Emerging market debt moves lower on new supply, Brazil concerns; Uruguay sells €300 million bonds

By Reshmi Basu and Paul A. Harris

New York, July 19 - Emerging market debt edged lower Tuesday as recent new supply began to weigh on the market.

And even more supply was added Tuesday as a sovereign and two corporates priced.

The Republic of Uruguay sold €300 million of 11-year bonds (B3/B/B+) at par to yield 6 7/8%.

The issue priced at the wide end of price guidance of 6¾% to 6 7/8%.

Deutsche Bank and UBS managed the transaction.

Also, Korea Electric Power Corp. priced a €250 million issue of 3 1/8% five-year notes (A2/A-) at 99.854 on Tuesday to yield 3.157%.

The yield came at a 34 basis points spread to mid-swaps, tight to the revised price talk of mid-swaps plus 34 to 35 basis points. The notes had initially been talked at a 35 basis points spread.

ABN Amro, Barclays Capital and HSBC ran the books.

And out of Russia, Industry & Construction Bank of St. Petersburg sold an offering of $300 million in three-year notes (Ba3//B+) at par to yield 6 7/8%.

The notes priced inside of revised price guidance. Guidance had been lowered to 6.95% to 7% from 7% to 7¼%. The size of the issue was also at the top of the $200 million to $300 million range.

ABN Amro and Deutsche Bank were the lead managers for the Regulation S transaction.

"Supply concerns are overheating the market," said a trader.

Meanwhile, the search for yield is drawing issuers into the market, even from rare companies such as Jamaica's wireless operator Digicel Ltd. The company set price talk Tuesday for an upsized offering of $300 million in seven-year senior notes (B3//B) in the area of 9½%.

The size of the issue was increased from $250 million.

JP Morgan and Citigroup are running the Rule 144A/Regulation S deal.

"There's a lot of liquidity right now," said a sellside source.

Nonetheless, all that new supply is causing the market to sell off slightly as the technical side is losing some ground, said sources.

Still, the market is in good shape, noted the sellside source. One can just look at the demand for new paper from Jamaica. The country priced an upsized offering of $300 million in 10-year bonds (B1/B) at 99.191 to yield 9 1/8% on May 25.

And then government-owned Air Jamaica Ltd. sold an upsized offering of $200 million in 10-year notes (B1/B) at par to yield 9 3/8% on June 28. That deal was increased from $150 million.

The sellside source said even with $500 million of new paper in the last month and a half, there is even more demand for additional Jamaican paper.

"That tells you that the market is fine," he said.

Issuers are tapping the market because it is a good opportunity to lock in rates, he added.

"[U.S.] Treasuries in the last month have come up," the source noted.

"Today [Tuesday] they were a little tighter. But in general, they have been trading wider.

"That is going to make for a rush to the market" before the end of summer, replied the source.

In separate news, emerging market accounts are focused on a new offering from Japanese bank Resona. The company is issuing dollar-denominated preferred global securities (Baa3/BBB-) on Wednesday.

The issue will be perpetual but will be callable beginning July 2015 at par. Guidance has been set at Treasuries plus 287.5 to 300 basis points or at a yield of the 7.085% to 7.21% area.

Merrill Lynch and Goldman Sachs are running the issue.

The trader said the book size is over $10 billion.

EM nudges lower

During the session, the market remained in a holding pattern ahead of Federal Reserve chairman Alan Greenspan's congressional testimony. The chief will discuss his economic outlook and perhaps offer hints into monetary policy.

The market is fearful that Greenspan will signal more rate hikes ahead when he appears before the House Financial Services Committee on Wednesday and before the Senate Banking Committee on Thursday.

That fear has filtered into U.S. Treasuries, which have marked a new range above 4.15% in recent sessions. The yield on the 10-year note shot up to 4.24% before closing at 4.18% on Tuesday.

"Everyone is waiting for Greenspan's comments tomorrow [Wednesday]," said the sellside source.

Additionally, the "bribes for vote" scandal in Brazil is adding stress as investors fear that president Luiz Inacio Lula da Silva's popularity will be marred by the on-going story, said the trader.

During the session, the Brazil C bond slipped half a point to 102 bid while the bond due 2040 fell 0.05 to 117.95 bid. The Ecuador bond due 2030 lost a quarter of a point to 87¼ bid. The Russia bond due 2030 fell 0.69 to 110.31 bid.

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